Trusts and Probates

Trusts are like a drill. The drill is used to bore holes in various materials, producing specific sized and targeted holes. Think of drilling holes in a bucket. A trust allows your money to flow from your bucket to specific people (your beneficiaries). As with using trusts, the drill has many different drill bits for different applications, no ‘one size fits all’ solutions here.

Why Should I Concern Myself With Trusts?

A trust is an arrangement where one or more people (the trustees) hold title to property with an obligation to keep or use it for the benefit of other people (the beneficiaries).

The settlor creates the trust, establishing discretion on who gets income and who gets the assets and when. The trustee manages or administers it. Some trusts have a protector who monitors the trustee. Beneficiaries are the eventual owners of the property in the trust, either immediately or eventually. They will get income from the trust and/or the property in the trust. You can decide which family members will be the beneficiaries, but it is typical to have it be the children or grandchildren.

Better dead or alive

My posts will focus on the two types of personal trusts. A personal trust is either a testamentary trust or an inter vivos trust.

Formal Or Informal Trusts, What Suits You?

Informal trusts are often set up at a financial institution with a simple form and are not designed to split income. Often a parent wishes to open an account and identify it as separate for the minor child. All income is generally taxed in the hands of the person who set up the account. The real purpose of this is to have the parent as the signing authority on the account and as the person responsible for the transactions on the account.

A formal trust has a trust agreement often set up by a lawyer and it specifies each of the following: the trustee, the property in the trust, its terms and conditions, and the beneficiaries. These trusts will cost you money to set up and require a much higher level of planning. The trusts I will discuss in this book are formal trusts.

Now It’s Personal

There are many types of personal trusts. I have compiled some of the most valuable for your consideration.

How to trust, when you are alive

An Inter vivos trust is one that is created when the person is living and it literally means “between the living”. For income tax purposes it pays tax on all income at the top tax rate and most often money transferred into it will be at fair market value triggering a capital gain. These trusts are used to defer income tax and also to have the beneficiary receive eventual ownership of the asset, while you retain control of it. You can be the trustee, or you can appoint another to manage it according to your wishes.

Nine benefits of Inter vivos trusts:

To split income. You can move your income-producing asset to a trust. If certain conditions are met, the income in the trust can be taxed in your family member’s hands at their lower rate rather than that of the trust. This is how most of the tax benefits with inter vivos trusts are used.

Assets protected from the beneficiary’s creditors.

Better management of assets in the trust than if they were managed in the hands of the young beneficiaries. Control of the money can be given to them when they become more financially responsible.

You keep control of your money. Enough said.

Avoid struggles between beneficiaries. If an asset is designed to be shared between the children, the trustee will have control of it so it’s not left up to the kids, eliminating the chance of them fighting over an asset such as a shared vacation property or cottage.

Security for your second spouse. By moving an asset or property into this type of trust, your second spouse will have income from it for their life, and when they die the remaining value goes to your children from your earlier marriage.

Intent to gift to minors. Since the law prohibits anyone under 18 years to own property, setting up a trust allows for the trustee to care for these funds until the kids become old enough to own the asset.

Privacy of the trust. The trust document is not accessible to the public.

Protects assets from spousal property claims. With the assets in a trust they are not co-mingled and do not become matrimonial property.

Tip: Have you considered having your cottage held in a trust? You can specify in the trust to hold the cottage until your youngest child reaches a set age. In a testamentary trust you can set aside money from your estate to cover cottage expenses, and set up an option for a specific child, or all children, to be able to purchase it.

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